The “B” Word – An Unlikely Scenario

b-wordAfter years of being the poster child for our broken economy, the real estate market is currently experiencing something it had grown quite unaccustomed to—unbridled optimism about its comeback.

We picked up the business section of the newspaper the other day and nearly every story involved vast improvements in our local real estate market; or the positive impact its recovery is having on other segments of the region’s economy.

To name just a few points of light, pending sales are at their highest levels in years, builders are scrambling to keep up with new orders, and the ratio of foreclosures and short sales—compared with other transactions—is declining throughout Southwest Florida. No matter where you turn for your daily news fix, real estate is being touted as the main engine driving the country’s economic revival.

The news has been so good, in fact, that we’re beginning to hear the “B” word tossed around again—“B” as in Bubble.

With sales way up, inventory way down, and especially with prices starting to rise, the pundits are naturally wondering if a new housing bubble is starting to form.

Here’s why such a scenario is highly unlikely in today’s market:

• Local home prices are indeed rising, a normal phenomenon in any given market where demand outstrips supply. It shouldn’t be forgotten however that prices also dropped by as much as 50% from peak levels before they began their recovery. Some markets, Sarasota included, were even declared “grossly undervalued.” As such, today’s price increases are being driven by a combination of low prices, historically low interest rates, low inventory, precious little new construction; and confident buyers in a recuperating economy unleashing several years of pent-up housing demand. In other words, market conditions are dictating prices, not market speculators

• As prices tick-up, many people who have been underwater on their mortgages will suddenly find themselves on dry land again; and thus free to sell. Supplies of existing homes will increase and should mitigate the quickening pace of property appreciation. Prices will be further mitigated as more and more new construction finds its way to market.

• Cash rules in today’s market, with as many as 3 out of 5 homes being sold without the benefit of financing. Therefore these buyers have a very real financial stake in the properties they commit to. Easy credit and excessive borrowing—which brought the market down in the first place—are no longer an option for would-be speculators hoping to make a fast buck with someone else’s money. Even if a bubble did form, this one wouldn’t threaten to take down the entire financial system.

• Today’s buyers are end users. They are not buying to flip, as much as to take advantage of extraordinary savings on first- or second-home properties to move into. Even investors—who are paying cash to buy and ready properties for the rental market—plan to lease them out to end-use tenants in order to earn steady investment incomes over the long term.

Today, the “B” word more aptly stands for Bargain. Once-in-a-lifetime bargains—in terms of home prices and historically low interest rates—are driving the largely cash-fueled property boom we’re experiencing now. For even though home prices are rising again, it’s important to remember that they are actually clawing their way back from as much as a 50% decline. Thus, they remain a relative bargain compared to what they were just a few short years ago.

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